Options Trader: Monday Morning Ideas

by: Philip Davis

Go Markets!

I got all my bearish sentiments out of the way here and here so let’s try to forget all that and stay positive, despite MOUNTAINS of evidence to the contrary, unless we get some clear indications not to be.

I took a bearish posture into the weekend with uncovered puts on the Diamonds Trust, Series 1 (NYSEARCA:DIA) (as well as calls sold against) along with short positions on oil and Goldman Sachs Group (NYSE:GS). My big insurance play was NEW as the logic was that a recovery there would spark a rally while a real collapse there would be a very cold slap in the bulls’ face.

We’ll be looking for positive moves from the following: Johnson & Johnson (NYSE:JNJ), Microsoft Corporation (NASDAQ:MSFT), The Procter & Gamble Company (NYSE:PG), United Technologies Corporation (NYSE:UTX) and Wal-Mart Stores, Inc. (NYSE:WMT) as they were our weakest Dow components last week while expecting continued strength from the following: Alcoa (NYSE:AA), The Boeing Company (NYSE:BA), Caterpillar (NYSE:CAT), Honeywell International Inc. (NYSE:HON), International Business Machines Corp. (NYSE:IBM), and Altria (NYSE:MO) - who were last week’s best performers. A rising tide of money flow should lift all boats and, other than hopeless cases like the General Motors Corp. (NYSE:GM)/Titanic, we’re going to need some real Dow leadership this week.

I Have No Idea

The best of the worst, to me, is P&G and not just because they are literally throwing in the towel - selling their European towel unit, which gives me an excuse to put up another picture of Towelie, but because they’ve done an amazing job integrating Gillette already, growing net income from $1.7Bn a quarter (average) in ‘05 to $2.7Bn in Q3 and $2.8Bn in Q4 and they already have a 23% market share in developing countries and the management expects to "derive $14Bn to $16B in synergies from this (Gillette) combination over time."

While they may dip down and test the 200 dma at $61 (they’ve come so close, why not at least pay a visit?), we can start accumulating The Procter & Gamble Company (PG) for our LTP buy picking up the Jan ‘09 $65s for $5.70. We will wait to sell calls against it but if this is a real rally, these guys should come out like champs over time. On Feb 20th, these contracts were trading at $7.75!

Asia shook it all off and turned positive today but I wonder if Japan’s 1.3% Q4 GDP number is really a reason for us to celebrate? It was the unwinding of the Yen carry trade that started this mess and a strengthening Japanese economy will keep the BOJ raising rates which will force our Fed to raise rates which will wipe out another 5% of the sub-prime loans which… Oops, sorry - I forgot I promised to stay positive.

So how about that Japanese economy? The Nikkei gained 128 points this morning and the Hang Seng tacked on 277 points (1.5%) and gains were pretty much across the board. Europe is flat as a pancake ahead of our open which, at 8:30, is already falling from what looked like a good start at 6 am. Here’s a snapshot of all the markets we watch (Europe as of 8:30):

Phil\'s US Markets

US Markets

So Europe is well on the road to recovery, but India and the Hang Seng are still faltering (even after the latter’s 277-point gain) while our own Dow, Transports and Nasdaq (surprisingly NOT the SOX) are pooping the party on this side of the planet. We’ll keep a very close eye on the transports, who have no excuse to go down on lower oil prices (danger zone 2,785) while the Dow will just kill us if it drops below 12,246 (see Friday’s Danger Chart).

Oil is off .90 in pre-market as the crushing effect of the Cushing barrel count once again rears it’s ugly head as traders scramble to dump contracts before next Tuesday’s close of the April contracts. Zman is making a very aggressive call that we will be seeing $57.50 and lower, and I can’t say I disagree with the logic!


Expect a wild week in the energy pits with an OPEC meeting this week and the last of the winter inventory reports on Wednesday. The lower the price of oil goes the more likely the ministers are to cut production so there may be an element of U.S. traders manipulating the price of oil DOWN for a change in order to force OPEC’s hand. That means any tightening statement from OPEC will be rewarded with buying while complacency will likely be punished by traders. Needless to say, we have a very fun week ahead…

Look for signs of the dollar coming off the mats and delivering a knockout blow to the commodity markets. As I’ve said before, there are just way too many dollar bears and nothing short of this country falling into a prolonged recession can push the Euro past the 60% gain it has already made against the dollar during the current administration. Congratulations boys, you’ve actually gotten our fiscal policy to the point where things pretty much can’t possibly be any worse!

Oil and Dollar

Gold is hugging that $650 line and REALLY can’t afford to fail there but there is still firm support from the 200 dma at $625 so there are many rounds to go in this particular battle.

Let’s watch those levels today but if we can avoid our danger zones, we may just end up running with the bulls once again - just keep those expectations in check until we really see it.

Don’t forget - Rocky lost that fight!